Vernoia, Enterline + Brewer, CPA LLC

Archive for February, 2015

At the end of 2014, Congress passed the Tax Increase Prevention Act of 2014 (2014 Tax Prevention Act) (P.L. 113-295), which extended numerous provisions for the 2014 tax year. One of these extensions provides parity for employer-provided mass transit and parking benefits under Code Sec. 132(f) through 2014.

In response, the IRS published guidance (Notice 2015-2) to clarify how employers should address the retroactive increase. The IRS also provided a special administrative procedure for employers to make adjustments on their Forms 941, Employer’s Quarterly Federal Tax Return, filed for the fourth quarter of 2014, and in filing Forms W-2, Wage and Tax Statement.

Background

Before the 2014 Tax Prevention Act, the adjusted maximum monthly excludable amount for 2014 for the aggregate of transportation in a commuter highway vehicle and any transit pass was $130; and the adjusted maximum monthly excludable amount for qualified parking was $250. The 2014 Tax Prevention Act, however, retroactively enacted parity between the two amounts for the 2014 tax year. Therefore, the maximum monthly excludable amount for the period of January 1, 2014, through December 31, 2014, is $250 for transit passes and van pool benefits and also $250 for qualified parking. However, nothing in the 2014 Tax Prevention Act mandates that employers provide additional transit benefits to employees.

Notice 2015-2

The IRS explained that, under the 2014 Tax Prevention Act, any transit benefits provided in 2014 by an employer to an employee in excess of $130 (capped at $250) is excluded from the employee’s gross income and wages. (The notice refers to this additional $120 as “excess transit benefits.”) The exclusion applies whether the employer provided the transit benefits out of its own funds or whether the transit benefits were provided through salary reduction arrangements.

The guidance clarifies, however, that employees may not retroactively increase their compensation reduction for 2014 to take advantage of the increase in the excludable amount for transit benefits in 2014. In addition, employees may not reduce their compensation by more than $130 per month in 2015 to make up for any permissible reimbursement of transit benefits incurred in 2014. The 2014 Tax Prevention Act‘s transit benefits parity provision applies to the 2014 tax year only.

Special procedure

Employers that treated “excess transit benefits” as taxable wages and that have not yet filed their fourth quarter Form 941 for 2014 (due February 2, 2015) should repay or reimburse their employees the over-collected FICA tax on the excess transit benefits for all four quarters of 2014, on or before filing the fourth quarter Form 941, the IRS explained.

The employer, in reporting amounts on its fourth quarter Form 941, may reduce the fourth quarter wages, tips and compensation reported on line 2; taxable Social Security wages reported on line 5a; and Medicare wages and tips reported on line 5c, by the excess transit benefits for all four quarters of 2014.

Employers that have filed the fourth quarter Form 941 must use normal procedures and must file Form 941-X, Adjusted Employer’s Federal Tax Return or Claim for Refund, to make an adjustment or claim a refund for any quarter in 2014, the IRS explained. Similarly, employers that, on or before filing the fourth quarter Form 941, did not repay or reimburse employees who received excess transit benefits in 2014 must use Form 941-X.

Forms W-2

Employers that have not furnished 2014 Forms W-2 to their employees should take into account the increased exclusion for transit benefits in calculating the amount of wages reported in box 1, Wages, tips, other compensation; box 3, Social Security wages; and box 5, Medicare wages and tips, the IRS explained. Employers that have already filed 2014 Forms W-2 should file Form W-2c, Corrected Wage and Tax Statement.

Taxpayers must obtain the IRS’s consent to change any of their accounting methods under Code Sec. 446(e). The IRS has updated and made changes to its revenue procedures for obtaining IRS consent. In Rev. Proc. 2015-13, the IRS has updated the general procedures for taxpayers to obtain either advance consent or automatic consent to change their accounting methods. In Rev. Proc. 2015-14, the IRS has described the accounting methods for which taxpayers can obtain automatic consent to change their method.

Roadmap

These procedures provide the roadmap for taxpayers to consult when changing an accounting method. For any change, taxpayers must submit Form 3115, Application for Change in Accounting Method. However, the timing for submitting the form depends on the change and the type or consent. Advance consent requires that the taxpayer file Form 3115 with the IRS and wait to obtain consent before making any changes. Automatic consent allows the taxpayer to make the changes on its own and to file Form 3115 in the year after the year of change.

Update

Rev. Proc. 2015-13 updates and supersedes the procedures that were in Rev. Proc. 2011-14 (automatic consent procedures) and Rev. Proc. 97-27 (advance consent procedures). The procedures clarify and modify rules for changing accounting methods in several dozen areas. Rev. Proc. 97-27 is superseded. However, certain provisions of Rev. Proc. 2011-14 remain in effect. Generally, the changes are effective for Forms 3115 filed on or after January 16, 2015 for a year of change ending on or after May 31, 2014. Transition rules apply for certain automatic changes.

Significant changes

The significant changes made by Rev. Proc. 2015-13 include provisions that:

Clarify that an issue is under consideration as of the date of the operative written notification to the taxpayer, and that an item ceases to be an issue under consideration after an examination ends unless the examining agent provides the taxpayer with written notification that the item is an issue placed in suspense;

Modify the rules for when a taxpayer under examination may file a Form 3115 by replacing “issue pending” and “consent of director” in with broad eligibility rules; and

Modify the rules for when a taxpayer under examination filing a Form 3115 may receive audit protection by replacing the 90-day window that began on the first day of the taxpayer’s tax year with a three-month window that applies to taxpayers that have been under examination for at least 12 consecutive months as of the first day of the three-month window.

In Rev. Proc. 2015-14, the IRS highlighted significant changes to its list of accounting methods for which automatic consent is available, including:

Research and experimental (R&E) expenditures under Code Sec. 174;

Reasonable allocation methods for self-constructed assets;

Changes from the cash to an accrual method for specific items;

Long-term contracts;

Trade and business expenses including materials/supplies and repairs/maintenance; and

Computing ending inventory under the retail inventory method

The necessity of implementing a change in a method of accounting based on current and changing IRS procedures is generally a situation faced by any business over the course of several years. This frequency has been accelerated for many more businesses recently because of requirements – and opportunities – connected with those situations listed above, and more.

Please contact this office if you have any concerns over how these new procedures impact your business.

The IRS recently issued the maximum fair market value (FMV) amounts that designate the proper valuation rule for employers calculating fringe benefit income from employer-provided automobiles, trucks, and vans first made available for personal use in 2015. Taxpayers with employer-provided vehicles within the designated FMV amounts may apply the vehicle cents-per-mile rule or fleet average valuation rule, as appropriate.

Background

An employer that has provided a vehicle for an employee’s personal use must include the value of that personal use in that employee’s income and wages as a fringe benefit under Code Sec. 61. Employers and taxpayers may calculate the value of their personal use using several valuation methods, including the cents-per-mile valuation rule outlined in Reg. §1.61-21(e) or the fleet average valuation rule under Reg. §1.61-21(d).

Cents-per-mile valuation rule

To qualify to use the cents-per-mile valuation rule, the employer must reasonably expect the vehicle to be regularly used in the employer’s business throughout the calendar year, or the vehicle must be used primarily by employees, including for commuting, and be driven at least 10,000 miles that calendar year.

Employers and employees arrive at the value of the fringe benefit provided in a particular calendar year by multiplying the standard mileage rate for the year by the total number of miles the vehicle is driven by the employee for personal purposes. The standard business mileage allowance rate for 2015 is 57.5 cents-per-mile (up from 56 cents-per-mile for 2014).

Employers and employees may not use the cents-per-mile rule, however, if the fair market value of the vehicle exceeds the sum of the maximum recovery deductions under Code Sec. 280F(a) for the first five years of service. The maximum 2015 FMV amounts for use of the cents-per-mile valuation rule are:

$16,000 for a passenger automobile (the same as for 2014 and 2013); and

$17,500 for a truck or van, including passenger automobiles such as minivans and sport utility vehicles, which are built on a truck chassis (up from $17,300 in 2014).

Fleet-average valuation

Employers maintaining a fleet of at least 20 automobiles can value the FMV of each automobile as equal to the average value of the entire fleet. The fleet average value is the average of the FMV of all automobiles used in the fleet.

The maximum FMV amounts for use of the fleet-average valuation rule in 2014 are $21,300 for a passenger automobile (the same as for 2014) and $22,900 for a truck or van (up from $22,600 in 2014).

The New Jersey Division of Taxation has issued a new electronic filing and payment regulation affecting tax preparers and taxpayers who file corporation business tax (CBT) returns. For tax years beginning on or after January 1, 2015, tax preparers who file corporation business tax returns must e-file such returns and (if instructed by the taxpayer) must also e-file all payments of corporation business tax, including estimated payments. For tax years beginning on or after January 1, 2016, taxpayers that are subject to the corporation business tax and submit their own returns must e-file such returns. Payments of corporation business tax liabilities, including estimated payments, must be made electronically whether remitted directly by the taxpayer or by the tax preparer as instructed by the taxpayer. N.J.A.C. 18:7-11.19, New Jersey Division of Taxation, effective January 20, 2015.

The required minimum distribution (RMD) rules require participants to start taking distributions when they turn age 70½. Treasury and the IRS have developed a new concept to enable retirees to preserve some of their retirement assets and to protect them from outliving their assets – the qualified longevity annuity contract or QLAC. At the same time, QLACS will help retirees to avoid limiting their retirement spending unnecessarily.

QLAC-eligible plans

A QLAC is a deferred annuity that will start paying benefits for life at an advanced age (up to 85 under IRS rules). Participants in defined contribution (DC) retirement plans, as well as owners of IRAs, can use a portion of their DC or IRA account to purchase a QLAC. DC retirement plans include a plan, annuity or account described in Code Secs. 401(a), 403(a), 403(b), 408 (other than a Roth IRA), and 457(b).

RMD relief

In calculating their RMD, which is based on their account balance, participants can deduct the price of the QLAC from their account. Without this relief, the RMD would be inflated to include the funds used to purchase the QLAC.

QLAC reporting

QLACs became available in 2014. The IRS has issued new Form 1098-Q, Qualifying Longevity Annuity Contract Information, for issuers of QLACs to report the contracts to the IRS and to the contract purchaser. Issuers must provide the form to the purchaser for the first year in which QLAC premiums are paid, and continue to provide the form until the earlier of the participant’s death or attaining age 85.

Form 1098-Q requires issuers to identify themselves, the participant, the plan, and the plan sponsor. Issuers also must provide the QLAC’s starting date, the annuity amount if payments have not begun, the total premiums, the premiums paid in 2014, the QLAC’s fair market value at the end of the year, and indicate whether the starting date may be accelerated. The IRS also encouraged issuers to assign an account number to each QLAC, and requires an account number if the participant has more than one QLAC.

The tax code imposes a penalty on taxes that are paid after the due date (generally April 15). Taxpayers may wonder whether to save, to pay their taxes on time and avoid the penalty, or delay payment and owe a penalty. While this is a personal decision, and will vary with the taxpayer’s circumstances, a taxpayer may prefer to use their funds for other purposes and delay the tax payment, especially where the penalty is relatively small.

General penalty

If an individual files a return on pay but fails to pay all of the tax shown on the return, there is a penalty of 0.5 percent of the unpaid tax, for each month or partial month of the delinquency period. There is a cap of 25 percent on the total failure-to-pay tax, with the maximum normally reached after 50 months of taxes due.

If the actual tax liability is less than the amount shown on the return, the penalty is also imposed on the difference between the actual tax liability and the amount paid. Thus, the 0.5 percent penalty is imposed on additional taxes determined to be due on audit for which the IRS has made a demand for payment. This penalty does not begin until the 22nd calendar day after the demand.

The penalty runs from the date prescribed for payment of the tax, until the IRS receives payment. Taxpayers can generally get a six-month extension for filing their return, but this does not extend the payment due date.

Payments

The basic failure-to-pay penalty applies if a taxpayer files, either on time or late, a return that shows a tax liability, where the taxpayer fails to pay the tax admittedly owed. Any credits that may be claimed on the return reduce the amount on which the penalty is imposed. These credits against the tax include withholding, estimated taxes, and any other timely payments, such as an amount from the prior year’s refund that the taxpayer asked the IRS to retain and apply against the current year’s tax. A partial payment after the due date of the taxes paid also reduces the amount of the penalty.

Installment agreements

The penalty is reduced to 0.25 percent per month for any period in which the taxpayer has an installment agreement with the IRS. The reduction does not take effect until the IRS accepts the agreement. The maximum penalty of 25 percent is not affected, but will not be reached until 100 months.

Loans

The IRS also advises that taxpayers may be able to borrow funds from a third party at a lower rate than the penalty, use those funds to pay their taxes on time, and owe less interest to the third party than they would have to the IRS.

Examples

Angie’s return and tax are due April 15. She files the return on June 17, paying her tax liability of $5,200 in full. The failure-to-pay penalty applies for three months, at 0.5 percent per month on $5,200. The total penalty is $78 ($26 per month times three months). The number of months is counted beginning from the April 15 due date; thus, the second month of penalties applies for May 15 to June 14, and the third month applies for June 15 to June 17.

Lee’s return and tax are due April 15. Lee files on October 15, showing $7,000 due in taxes. He pays $2,000 with the return, and pays the balance of $5,000 on May 3 of the following year. The failure to pay penalty applies to the $7,000 owed for seven months and to $5,000 for six months. The penalty thus equals $245 ($35 per month on $7,000, times seven) plus $150 ($25 per month on $5,000, times six), or a total of $395.

The IRS and the U.S. Department of Health and Human Services (HHS) are planning outreach efforts during filing season to remind taxpayers about new requirements under the Affordable Care Act. These projects will highlight the individual shared responsibility requirement, exemptions to the individual mandate, and more. The IRS has already posted information about the Affordable Care Act on its website for taxpayers and tax professionals. The agency reported it will continue to work with tax professionals to give individuals the information they need to file their returns.

Shared responsibility payment

Unless exempt, individuals without minimum essential coverage will make a shared responsibility payment. For 2014, the individual shared responsibility payment is the greater of: one percent of household income that is above the tax return filing threshold for the individual’s filing status; or the individual’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285, but capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014.

For 2014, the annual national average premium for a bronze level health plan available through the Marketplace is $204 per month per individual, but $1,020 per month for a family with five or more members. In January, the IRS announced the 2015 monthly national average premium for qualified health plans that have a bronze level of coverage for taxpayers to use in determining their maximum individual shared responsibility payment. The monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through ACA Marketplaces in 2015 is $207 per individual but $1,035 per month for a family with five or more members.

Exemptions

The ACA exempts certain individuals from the shared responsibility requirement. Some exemptions may be claimed when an individual files a return. Others are only available through the ACA Marketplace; and others may be claimed either way.

The IRS anticipates that many individuals will seek an exemption based on a hardship. Among the circumstances that may qualify for a hardship exemption are (not an exhaustive list): the taxpayer was evicted in the past six months or was facing eviction or foreclosure; the taxpayer recently experienced the death of a close family member; or the taxpayer experienced a fire, flood, or other natural or human-caused disaster that caused substantial damage to his or her property; or the taxpayer filed for bankruptcy protection in the last six months. In most cases, individuals will seek a hardship exemption through the ACA Marketplace. If granted, the Marketplace will issue a certificate to the individual, who will enter that number on his or her Form 8695, Health Coverage Exemption.

Along with hardship, a number of other exemptions are available. They include exemptions based on short coverage gap, incarceration, income below filing threshold, and more.

Self-reporting

Individuals who had minimum essential coverage in 2014 will self-report on their return. Individuals will “check a box” to declare they carried minimum essential coverage. The check box is located on Line 61 on Form 1040, U.S. Individual Income Tax Return, Line 38 on Form 1040A, and Line 11 on Form 1040-EZ.

Employer reporting

Code Sec. 6056 requires applicable large employers (an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year) to file information returns with the IRS and provide statements to full-time employees about health insurance coverage. Code Sec. 6055 imposes a similar requirement on health insurance issuers, plan sponsors of self-insured group coverage, and others. The IRS has issued draft forms for Code Sec. 6055 and 6056 reporting and is expected to finalize the forms, and instructions, in 2015.

The new reporting requirements were optional for 2014. They are mandatory for 2015. An applicable large employer must file information returns with the IRS and furnish statements to employees beginning in 2016 to report information about its offers of health coverage to its full-time employees for calendar year 2015.

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Disclaimer

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Vernoia, Enterline + Brewer would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
Vernoia, Enterline + Brewer, CPA, LLC
91 West End Avenue
Somerville, NJ 08876
Main Number (908) 725-4414
Fax (908) 725-4717